Chapter 4You Must Know What Drives Investment Returns

Hopefully the previous chapter helped convince you that repeated attempts at forecasting markets likely wouldn't provide you with a path to investment success. With that in mind, let's explore some alternative methods for putting your money to work in the financial markets. We begin with a brief history lesson.

On December 31, 1975, Jack Bogle launched the First Index Investment Trust, a vehicle designed to track the performance of the S&P 500 without trying to beat that index. This innovation was originally lampooned by both the media and competitors, and was called “un-American” and “Bogle's folly.” The chairman of Fidelity Investments at the time, Edward Johnson, was quoted as saying “I can't believe that the great mass of investors are going to be satisfied with receiving just average returns.”

And yet today, a great mass of investors, both individual and institutional, has indeed piled into market tracking products, thereby sacrificing the opportunity to “beat the market.” In fact, investors have moved something on the order of six trillion dollars into indexed products.

And why have they done that?

In order to answer that six-trillion-dollar question, let's start with a couple of questions I'd like you to answer for yourself.

  • Investment A: Would you be willing to invest your retirement account in something that has a 48% chance of success?
  • Investment B: Would you be willing to stake your family's financial future ...

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